CARD Act may have cost consumers billions

Back in 2009, the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act was signed to great fanfare, with the White House lauding it as a "turning point for American consumers." The question is, which way have things turned for consumers? By at least one measure, the CARD Act may have been a multi-billion dollar turn in the wrong direction.

The CARD Act was implemented on Feb. 22, 2010, and the two-year anniversary of this date marks a fair time to assess the Act's successes, failures, and overall implications for consumers with credit cards.

Counting the costs of the CARD Act

Though the CARD Act did not take effect until February 2010, it had been signed by President Obama nine months earlier, and discussed openly for months before that. In the interim, there was a flurry of activity among credit card companies as they adjusted their rates and fees presumably in anticipation of the new law.

So, to get a true reading on the impact of this law, it was necessary to go back to late 2008 for a look at how things were before anticipation of the CARD Act started to change things. To do this, CardRatings.com compared terms on roughly 500 credit card offers from late 2008 and late 2011, and found the following impacts that may be attributed to the CARD Act:

Higher interest rates. From the end of 2008 through late 2011, the prime bank rate was unchanged, and mortgage rates fell. Credit card rates, on the other hand, rose. The CardRatings.com study found that annual percentage rates on new credit card offers rose by an average of 2.1 percent over that period. While these higher rates wouldn't have immediately affected existing customers, over time this new rate environment would start to affect more and more balances. Based on roughly $800 billion in outstanding U.S. credit card debt over much of the past two years, this 2.1-percent increase in credit card rates would translate to an annual additional consumer cost of $16.8 billion.

Heavier burden on customers with poor credit. In part, the CARD Act was intended to protect customers with credit problems. Those cardholders were subject to the steepest rises in their credit card rates. However, it is these same customers who appear to have been hurt the most by rising rates over the past few years. While the lowest rate tier of credit card offers, for consumers with excellent credit, rose by only 1.6 percent from late 2008 to late 2011, the highest rate tier, for consumers with poor credit, rose by an average of 3.4 percent over the same period.

Ballooning balance transfer fees. Balance transfer fees have also risen over the past few years. For one thing, fewer cards now put a cap on the maximum balance transfer fee. Instead, they charge a percentage of the amount transferred. In late 2008, 31 percent of credit card offers had a cap on balance transfer fees. Now, just 4 percent do. In addition, the average percentage charged has risen to 3.3 percent from 2.1 percent, a difference that would cost you $120 more on a $10,000 balance transfer.

Can all of these costs be blamed on the CARD Act? Given the aftermath of the 2008 credit crunch and the significant market changes as a result (including credit card companies reducing credit lines or cancelling cards outright in order to manage their risk), it's impossible to be certain. But as the most significant change in the industry between the two time periods that were compared, the CARD Act seems to bear much of the responsibility.

Considering the benefits

At the same time, there have been some benefits to the CARD Act:

Fewer late fees. The CARD Act required that billing cycles be standardized, and that customers be given a minimum of 21 days to pay a credit card bill. In one snapshot comparison, the Consumer Financial Protection Bureau found that between January and November 2010 monthly late fees had dropped by $474 million. This suggests that consumers may be paying around $5 billion less in late fees every year compared to before the CARD Act.

Fewer over-the-limit fees. Similar to overdraft fees on your checking account, over-the-limit fees are charged if you exceed your credit limit. The CARD Act banned credit card companies from charging this type of fee unless you expressly opt into the program. If you don't opt in, transactions which would exceed your credit limit are simply denied. Since the new law, many credit card companies have backed away from over-the-limit fees: Only 40 percent of credit card offers feature those fees now, compared with 95 percent before the CARD Act.

Lower over-the-limit fees. Perhaps because credit card companies now have to convince you to opt into fees for exceeding the credit limit, those fees have become more competitive. CardRatings.com found that the average maximum over-the-limit fee is now about $14, down from $33 in late 2008.

Advocates of the CARD Act would claim one other benefit: that the law has limited the circumstances under which interest rates can be raised in reaction to economic events, your payment history and your changing credit status. However, if credit card companies have responded by raising rates in advance and across the board, it hardly seems that consumers are better off.

Shifting the burden among credit card holders

At this point, it is impossible to tell how much the lower fees in some areas are counteracted by higher fees in others as a result of the CARD Act, but the 800-pound gorilla in the discussion is the $16.8-billion potential added annual cost due to higher interest rates.

Besides the likelihood of a higher overall cost, one thing the CARD Act has clearly done is shift the way the cost burden is distributed among credit card holders. By protecting cardholders who are late with payments or have credit problems, the CARD Act seems to have caused cardholders in general, including customers with excellent credit, to pay higher interest rates.

But wait, there's more. The implications of the CARD Act go beyond the reach of that particular law. The CARD Act was followed a year later by the Dodd-Frank financial reforms, which included a variety of regulations addressing checking account fees. The similarity is that both have produced some unintended consequences. The consistent theme is that when regulators try to micro-manage the banking business to benefit certain customers, the outcome seems to be higher costs for everyone.

Richard, you omitted one clear cost and one clear benefit of the CARD Act: Anticipating the act, most major credit card providers reduced credit limits, which among other things hit a majority of consumers on their FICO scores (credit utilization). But an extra benefit of the Act was the provision for payment allocation, that any payment over the minimum amount due would go towards the HIGHER APR balances.
@ Josh Frank, the ABA agrees the law helped consumers? Am I supposed to sleep worry-free now? isn't the ABA comprised of the biggest credit card providers?

Richard, while I appreciated much of your argumentation in your reply, I find it fascinating that you are afraid that the tightening credit standards may produce and "apples and oranges" problem of unfair comparison, between credit cards issued in 2008 and in 2010 when the standards had been raised. But you use and reiterate in your reply that declining mortgage interest rates are an appropriate measure of interest rate environment. Comparing an unsecured credit card to a housing mortgage after 2008 is about as apples and oranges inappropriate as I can imagine. As you well know, after the rampant abuses of the non existent underwriting standards, appraisal abuses etc. and the glut of subprime, Alt A with rate escalators, etc crushing the mortgage backed securities market, banks basically started over under MUCH tighter lending standards post meltdown. The credit standards for a housing loan and a unsecured credit card are far different. While your point that some banks raised rates for credit impaired individuals might be true, it is a stretch to claim all customers paid more.

I was really disappointed in your story. While some banks certainly raised rates in response tot he CARD act, there were several other factors that you completely ignored. For example, the mortgage crisis, Investment bank meltdown, financial crisis were ALL happening at this time and banks were frantically searching for any additional income they could squeeze out of customers. Second, you didn't mention the provision that saves people who transfer balances tons of money, namely that banks have to apply extra payments (above the minimum) against the highest interest rate in a tiered interest rate account scenario. In the past, making a balance transfer at a low interest rate only worked in your favor if you could immediately stop using that card to charge because they bank applied extra funds to pay off the lowest interest rate first, effectively shielding high interest balances from payoffs. You had balance transfer cards down to zero before taking advantage of a low rate and then treat them like a personal loan and not add any charges to them if you wanted to actually benefit from the low rates. The CARD act changed all that. Now, if you pay extra on credit accounts, the extra goes to the highest interest rate, allowing you to pay off the high rate, and benefit from the low rate. Report both sides completely please.

Tom:Sorry you were disappointed in the story, but I disagree that we failed to report both sides. The story does deal with both positive and negative effects of the CARD Act.As for the balance transfer rules that you point to as a positive, it's worth noting that since the CARD Act, balance transfer fees overall have risen, and many companies have removed the caps on those fees, charging instead a straight percentage no matter how big the transfer. This is yet another demonstration that trying to micromanage how an industry prices its services is like squeezing one end of a balloon - the fees just flow somewhere else.Overall, the position of the story is not against legislation. As the article points out, there were some positive aspects of the CARD Act. I think if supporters were more willing to acknowledge the Act's shortcomings as well, the next piece of legislation might be more on target.Addressing your second comment: Agreed that mortgage rates are not a perfect comparison with credit card rates, but the fact remains that interest rates across the board - from Fed rates to 30-year bonds - have fallen since 2008. Therefore, to see average rates on credit card offers rising over that same time period suggests the industry has been affected by something outside the normal economics of the business. Also, I agree that it would be a stretch to claim that all customers paid more - we are simply pointing out that with average offers rising, it seems likely that many customers are paying more.

Thank you for your feedback. I am not sure exactly which Center for Responsible Lending report to reference. However, I am familiar with the stats published by the Federal Reserve. And, in their recent report (http://www.federalreserve.gov/releases/g19/Current/#fn4a), the average rate was 13.40% in 2009-2013 up from 12.08% in 2008. During that time there was no change in the Prime Rate. And, although the average rate has fallen to 12.36% since then, it is still higher than what was reported for 2008. Additionally, there are many other factors to consider such as the change in defaulted accounts, accounts closed by issuers due to the impending CARD Act and credit crisis, and accounts closed by consumers to avoid pre-CARD Act rate hikes.While there may have been a disconnect in many cases between the advertised rates and the rates customers actually obtained, due to their credit standing and other factors, it has generally been the case that customers with good credit could get the lowest advertised rate. The fact that even the lowest rate tiers have gone up since the passage of the CARD Act suggests that the cost of credit has gone up even to people with top credit ratings - and this in an environment in which interest rates have otherwise been falling.Also, although the fees for subprime cards have improved, several issuers have found ways to get around it. For example, First Premier responded by changing rates on their offers - which now simply include only somewhat less exorbitant fees - from 9.9% to 79.9%.Regardless of the number of mail outs - which is more of a return to normal than an increase - more people do not have access to credit. Issuers have started to loosen up credit requirements as the economy starts to recover, but they still haven't returned to normal. And, even if they had, we all know it wouldn't be due to the CARD Act. Also, according to Synovate Mail Monitor, a big part of that increase was driven by Capital One re-entering the subprime market.I definitely agree that the CARD Act has forced issuers to be more transparent overall and that's certainly a good thing. We don't dispute the CARD Act having many positive effects, but we can't deny the negative effects either.We would love to give you an opportunity to express your point of view via guest post on CardRatings.com.Amber Stubbs, Managing Editor, Cardratings.com

The figures involved are certainly open to interpretation, but there is too much quantitative evidence to dismiss this piece as just "plain wrong." Three major points concerning credit card rates stand out:1. While the Fed data that Josh Frank cites is worth noting, making comparisons of rates paid over a time period in which card companies have tightened their credit standards can result in an apples-and-oranges comparison. In other words, higher credit standards would be expected to push rates down.
2. Rates offered will always differ somewhat from the actual rates paid, but it is reasonable to expect that over time an increase in the rates offered will have an impact on the rates consumers pay.
3. Given the falling interest rate environment of the past few years, in which mortgage rates by fallen by over a full percentage point, the fact that we are seeing any evidence of a rise in credit card rates suggests something unusual is going on there.Richard Barrington
MoneyRates.com

This editorial is just plain wrong about the CARD Act, which has helped lower the cost of credit cards. The interest rate banks offered customers in solicitations used to be widely lower than what people actually ended up paying - a kind of bait and switch. Our research shows that what's gone up is the rate offered in solicitations - not the rates people actually pay. So there's less bait and switch. Read our report at responsiblelending.org. We took the best available information from the Federal Reserve on what people actually paid before and after the CARD act took effect. For the time period Barrington uses, credit card interest rate DROPPED to 12.78% from 13.36%. Other data shows subprime consumers may have benefitted the most, e.g., the worst subprime cards effectively charged a 75% APR in fees alone, which is no longer legal. Since the CARD Act rates are down, fees are flat and mail volume is way up and goes to a broader swath of the public. The new law has made prices more transparent, which breeds competition, which in the long run reduces price. Even the American Bankers Association agrees the law benefits consumers.- Josh Frank, senior researcher
The Center for Responsible Lending.

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